Flipkart’s acquisition of Snapdeal may face FEMA road bump

The e-commerce company will need to comply with RBI's rules on foreign exchange as its holding company is domiciled in SingaporeSugata Ghosh&Biswarup Gooptu | ET Bureau | June 13, 2017, 08:41 IST

The anticipated acquisition of troubled online marketplace Snapdeal by its rival Flipkart will have to deal with Reserve Bank of India rules on foreign exchange and may have to be specially structured to protect the interest of Snapdeal shareholders.

Flipkart, the country’s largest ecommerce company which was valued at $11.6 billion after its last funding in April this year, will have to make sure that the acquisition does not violate rules under the Foreign Exchange Management Act (Fema), given that its holding company Flipkart Pvt Ltd is domiciled in Singapore.

In the proposed all-stock deal, estimated at $700 million-$1 billion, shareholders of Snapdeal would receive Flipkart stock. But issuance of shares by Flipkart Singapore to Indian shareholders of Snapdeal would need a specific permission from RBI. Otherwise, the transaction, in the strict legal sense, could be construed as reverse round-tripping and breach of Fema rules, according to senior lawyers and finance professionals ET spoke to.

RBI typically puts a question mark on cross-border transactions that result in residents owning shares of an overseas company that has stake in another Indian company. It views such flow of funds or securities as round-tripping though several such transactions are aimed at serving genuine business interests.

In the past six months, RBI has sought explanations from many software, pharma and manufacturing companies whose overseas subsidiaries have raised funds and invested in Indian firms. Flipkart, which is currently undertaking legal and commercial due diligence of SoftBank-backed Snapdeal, primarily operates its ecommerce platform in India through its wholly-owned subsidiary Flipkart Internet Pvt Ltd.

SHARES OF FLIPKART SINGAPORE

However, Snapdeal’s local shareholders, which includes Ratan Tata and PremjiInvest — the personal investment arm of Wipro Chairman Azim Premji — are likely to either prefer a direct stake in Flipkart Singapore or certain ‘economic interest’ in Flipkart’s overseas holding company which when listed would give them an exit opportunity. This would require Flipkart Singapore to issue its shares to the non-resident as well as resident shareholders of Snapdeal (stock swap).

“Such a stock swap will need RBI approval for Flipkart Singapore to acquire shares of an Indian company for consideration other than cash, and for the resident Indians to own shares of a foreign company (Flipkart Singapore), which may be governed by the ODI (overseas direct investment) guidelines,” said Prem Rajani, managing partner at law firm Rajani Associates. “However, if the proposed transaction would involve Flipkart Singapore to issue its (Singaporean) company shares to non-resident shareholders of Snapdeal and Flipkart India issues its (Indian) shares to resident shareholders of Snapdeal, then RBI permission may not be required for issue of Flipkart’s Indian company shares to the resident shareholders. If, at a later date (whether at the time of IPO of Flipkart Singapore or otherwise), Flipkart Singapore desires to provide an exit to the erstwhile resident Indian shareholders of Snapdeal (who would by then be Flipkart India shareholders), then such a purchase of shares will have to comply with RBI pricing guidelines,” said Rajani.

Neither Flipkart nor Snapdeal responded to ET’s email query.

“It’s understandable if Snapdeal shareholders are reluctant to receive shares of Flipkart’s Indian arm because it’s more likely that the Singapore holding company of Flipkart would be listed first. But if they are given shares of the Indian company Flipkart Internet, then they could ask for an option to sell the stock to Flipkart later,” said a banker who is not an advisor to the deal.

The Fema rule is an issue that Flipkart and Snapdeal will have to deal with to consummate the proposed deal.

“While there is no fund flow, there is indirect consideration if Snapdeal shareholders here are issued Flipkart Singapore stock. Flipkart may plan to give an undertaking to convince RBI to the effect there will be no round tripping. In case of specific money flow overseas RBI possibly could have been convinced of such money to be earmarked for non-Indian investment.

However, in the situation stated above it may be difficult to convince RBI since there will be no actual money flow whilst parent shall still derive additional value from its subsidiary post the transaction,” said Tejesh Chitlangi, partner at IC Legal.

Senior officials of Snapdeal have begun reaching out to the minority stakeholders through Credit Suisse, which is representing Snapdeal in the deal talks, to get their assent for the sale to Flipkart, according to people aware of the matter. Together, shareholders not represented on Snapdeal’s board own nearly 40% of the company.

Last month, PremjiInvest, which had invested about Rs152 crore in Snapdeal for about a 1.17% stake in the company, has formally reached out to the company’s board asking for greater clarity on the proposed sale to Flipkart, as well as on the rights of the minority stakeholders.